A beneficiary’s interest in a trust may be property of the bankruptcy estate. However, any trust containing spendthrift provisions that make the beneficiary’s interest in the trust non-transferable are protected from the beneficiary’s creditors. 11 U.S.C. 541(c) honors state spendthrift clauses. Therefore, if the trust is properly created under Massachusetts law pertaining to trusts, the bankruptcy code will honor the settelor’s intentions and keep the debtor-beneficiary’s interest in the trust from becoming property of the bankruptcy estate.
Trust beneficiaries should be careful, however. If the settler and beneficiaries are the same, the trust is self-settled, rendering spendthrift provisions unenforceable. Further, if the doctrine of merger applies (described above), the trust will cease to exist and negates the spendthrift protection.
This reinforces what I often try to gently explain to parents about leaving money in trust with proper spendthrift provisions rather than leaving it outright to their adult children. When our children are very young it's often difficult to imagine that they might later have problems with substance abuse, broken marriages, or debt for other reasons. Rather than trying to control our children from our graves, we protect them from unfortunate circumstances as well as protect our own efforts at saving to provide for them when we leave them their inheritance in protected trust. For ourselves during our lifetimes, beyond the Revocable Living Trust we have other options to protect our assets if we have circumstances that make us more likely to be subject to future claims of creditors. This is a great topic about which to ask your estate planning attorney for advice about what makes the most sense for you and your family under all of your unique circumstances.
ReplyDeleteI'm in California and am 18 months into a CH 13. My father in law recently passed and my husband is the trustee of the estate. There is a spendthrift clause, will we be protected or is it when funds are available that the bankruptcy trustee can take the funds?
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DeleteYour question is a bit vague.
DeleteAre you also indicating that your husband is also a beneficiary of his father's trust (in addition to being the trustee)?
Is your husband also a part of the Chapter 13 (i.e., a joint Chapter 13)?
In any case, assuming the answer to both of these questions is "yes", I would immediately consult with your bankruptcy attorney. Trust law varies widely state to state, and I am licensed in New York and Massachusetts only. However, there are some issues to be aware of:
1. Does the influx of cash from the trust assets vesting in your husband alter the Chapter 7 reconciliation analysis (which was done in conjunction with your Chapter 13 plan); and
2. Does the periodic distribution of principal to your husband count as "income" for Chapter 13 purposes? (I believe the answer is yes); and
3. In terms of the spendthrift provisions being reachable AS AN ASSET (as opposed to as income) by the bankruptcy court, that is a question best suited for an attorney familiar with California trust law, and who as reviewed a copy of the declaration of trust.